Iran oil shock stirs memories of 1997 Asian Financial Crisis — but here’s why history may not repeat itself
A month after the worst disruption to oil supplies since the Arab embargo of the 1970s, the economic pain spreading across Asia is reviving a troubling question: Could it be 1997 again?
The parallels are hard to ignore. The fact that Asian currencies are under pressure increases the risk of capital outflow. While increasing energy costs push governments to take emergency measures, central banks are also reducing their foreign exchange reserves.
In Thailand, policymakers have moved towards rationing gasoline. Meanwhile, increasing pump prices in the Philippines prompted the government to take action. declare a national emergency. Widening trade deficits and rising inflation expectations across the region are reminiscent of the Asian financial crisis that began in 1997.
But economists say the similarities may be largely superficial, with more flexible exchange rate regimes and deeper foreign exchange reserves providing a buffer that helps absorb some of the shocks.
“Crises can take many shapes and [Iran] The crisis is completely different,” said David Lubin, a senior research fellow at Chatham House.
He noted that the period in 1997 was driven by “a toxic mix of fixed exchange rates, high levels of short-term external debt, low levels of foreign exchange reserves and a high current account deficit.”
“These days Asian economies are much better protected – precisely because of the legacy of the crisis of the late 1990s.”
The region’s financial architecture has also “improved significantly over the last three decades”, with deeper local markets, broader domestic investor bases and much less reliance on short-term foreign financing, said Fesa Wibawa, head of fixed income at Aberdeen Investments.
This, he said, reduces the risk of sudden capital flight and forced deleveraging that defined the 1997 crisis.
A Sri Lankan worker walks past a $76 million oil tank farm in the southern deepwater port of Hambantota on June 22, 2014. Sri Lanka hopes its new port at the island’s southern tip will become a major refueling hub along the East-West sea route. AFP PHOTO/ Ishara S. KODIKARA (Photo credit should be Ishara S. KODIKARA/AFP via Getty Images)
Ishara S.kodikara | Afp | Getty Images
Financial shock and physical shock
The 1997 crisis was a shock to financial accounts, where bank inflows dried up. But Brad Setser, a senior fellow at the Council on Foreign Relations, a think tank, said the ongoing crisis is a shock to the current account as oil and product flows decline.
“One is a financial shock, the other is a physical or supply shock. For the worst-hit Asian economies, it is 97/98 [crisis] It was a much bigger shock,” he told CNBC via email.
By 1997, Southeast Asian economies had built up large amounts of short-term dollar-denominated debt, backed by quasi-fixed exchange rates and dangerously weak reserve buffers. When speculative trade piled up, Thailand, Indonesia, the Philippines, and Malaysia were forced to abandon their fixed exchange rates; This triggered cascading defaults and deep economic contractions that were worsened by the International Monetary Fund’s austerity programs.
The main challenge facing Asia in the current crisis is the effective blockade of the Strait of Hormuz, which blocks approximately one-third of the oil supplies needed for the region’s economy. Of the 30 million barrels needed, approximately 10 million barrels per day do not pass through the artery. Diesel and jet fuel prices have also increased rapidly in recent days due to the supply shortage across Asia.
spare bumper
According to the US, South Korea’s foreign exchange reserves are over $400 billion as of the end of January. Federal ReserveThere was a sharp increase from approximately $30 billion to $40 billion during the 1997-1998 crisis. South Korea’s local currency bond market also grew about 3,500 trillion Korean Won ($2.3 trillion) with foreign investors holds approximately 21% of outstanding bondsA pillow that was not available in the late 1990s.
India’s foreign exchange reserves are approx. $688 billion after a while a series of interventions Since the war, the rupee started to be supported by the Reserve Bank of India. Countries such as Indonesia, the Philippines and Thailand also have much larger reserves than they did three decades ago.
Unlike the late 1990s, when many Asian economies held large amounts of dollar-denominated debt (which meant a weak currency exacerbated financial distress), most countries in the region have now built up dollar reserves. Weak currencies, while troubling, can provide some business benefits rather than increasing financial losses.
Eurasia Group China Director Dan Wang said that exchange rate reforms also strengthen the resilience of the region. In 1997, the hardest-hit economies had semi-fixed exchange rates, forcing central banks to spend reserves to protect their currencies. As reserves were depleted, currencies collapsed.
Today, most Asian currencies are allowed to move more freely; This means they can absorb the pressure by gradually weakening and reduce the risk of collapse under the pressure of the advocated fixed exchange rate. Larger foreign exchange reserves also added a layer of protection for central banks to maintain their currencies.
“During the oil shock, abundant reserves, especially in Thailand and the Philippines, eliminated the need for aggressive interest rate hikes to maintain the stable level,” Wang said. “The problem these countries face is 1775727770 Stagflation is possible but the financial system remains intact.”
Stagflation risks
Economists warn that Asian economies are bearing the brunt of the protracted conflict in the Middle East as the oil-dependent region faces a physical shortage of its primary energy input, potentially increasing the risk of stagflation.
Alicia García-Herrero, chief economist for Asia Pacific at Natixis Bank, said the crisis was not self-inflicted, but fiscal space was much more constrained than in 1997, with high levels of public debt and limited space for aggressive stimulus.
A remittance center in Cebu, Philippines, on Friday, September 1, 2023.
Veejay Villafranca | Bloomberg | Getty Images
Indonesia and the Philippines appear to be the most vulnerable, he said, with risks centering on capital outflows, exchange rate pressure on the rupee and peso and tighter fiscal buffers for subsidies.
But García-Herrero said investors positioned across the region were being cautious rather than panicking, with selective outflows from Indonesian bonds balanced by moderate net inflows into regional equities.
“There has been no large-scale capital flight seen yet,” he said.
Indonesia’s 2026 energy subsidy budget assumes crude oil at 381.3 trillion rupees Oil prices are at $70 per barrelAuthorities marked the worst-case scenario as $92. Brent crude oil futures for June delivery were around $97 a barrel on Thursday after the United States and Iran reached a two-week ceasefire agreement.
The Philippines, one of the region’s most oil-exposed economies, has also seen fuel prices rise rapidly as the government has limited space to increase subsidies. Headline inflation increased in the country 20-month high 4.1% It increased in March from 2.4% in February.
The oil shock will not hit every country equally. Malaysia, Singapore and China appear less vulnerable to an energy supply shock thanks to their current account surpluses, strong strategic reserves and more diversified energy sources, industry veterans said.
Singapore stands out as one of the most resilient economies due to its diversified growth model and strong institutions, García-Herrero said, while Malaysia also benefits from its status as an energy exporter and continued inflows into semiconductor and AI-related investments.
Robin Brooks, a senior fellow at the Brookings Institution, stated that the oil shock could spread beyond Asia, adding that if Iran hits an oil tanker in the Strait of Hormuz, “we will see a rise in oil, we will see emerging market currencies take a big hit.”
Brooks said emerging market currencies could come under heavy pressure, forcing central banks to sell U.S. Treasuries to raise dollars to protect their own currencies.
Selling pressure could push US yields higher and cause volatility in global bond markets.
Wibawa said capital flows today appear “more volatile and market-driven, even if they are generally less destabilizing than in the past.” He described recent currency movements as part of market adjustment rather than signs of developing systemic stress.
Wibawa also noted the lack of extensive currency mismatches, unhedged foreign exchange risks and lack of transparency that defined the 1997 crisis.
The lesson of 1997
The Asian financial crisis, one of the worst emerging market shocks of the 20th century, prompted policymakers in the region to spend the following decades building fiscal and fiscal buffers that are now being tested.
The question now is how long the shock will last and whether the physical energy shortage can be resolved before the economic damage gets out of control.
“Time is running out to de-escalate tensions to avoid major costs to the world economy,” said Rob Subbaraman, chief economist at Nomura Bank, adding that the rise in energy prices has lasted long enough to have a significant impact on the global economy.
“If the US further escalates tensions and/or puts the US on its toes, the initial inflation increase could quickly turn into a growth shock,” he said.
— CNBC’s Sam Meredith contributed to this report.
